Only two months after a deal was finally reached between Russia and Ukraine to restart grain exports out of Ukraine’s Black Sea ports, Russia is threatening to pull out of the agreement. What are the reasons and what will be the consequences?
July 2022: Russia and Ukraine Sign Deal in Turkey
Russia and Ukraine signed a dealon July 22nd 2022 in Istanbul to allow exports of grain and other agricultural products to resume from selected Ukrainian Black Sea ports after months of Russian blockade.
At that time, storage capacity in Ukraine was reaching its limits with much of the 2022 wheat harvest and the approximately 20 million metric tons of grains and oilseeds harvested in 2021 remaining in storage.
The deal, brokered by Turkey and the United Nations, was widely praised by world leaders; Resuming Ukraine trade should help ease market prices, consolidating the reductions seen in the last few months and helping to bring them back to the pre-COVID-19 levels of 2020.
September 2022: Putin Announces Review of the Deal
In September, President Putin announcedthat the grain deal is under review by Moscow “because Ukrainian grain is being shipped not to the Middle East and Africa, where it is most needed, but to Europe.”
At the time of his claim, 108 ships had left Ukrainian ports, with 47% of the grain going to Turkey and Asian countries, 17% heading to Africa, and 36% going to the EU. In any case, as Putin himself acknowledged in the same comments, neither of the two documents Russia signed to enable the export of Ukrainian grain specified any destinations, belying the Kremlin’s apparent concern over the food situation in the world’s poorest countries.
Moscow’s withdrawal from the deal would deprive Ukraine of a major part of its hard-currency revenues, and will further drive up global food prices and inflation in Europe. On the other hand, Russia’s losses, would be insignificant, amid the enormous trade surplus it is currently seeing from soaring energy prices.
What Happens Now?
For Ukraine, the deal is not just a source of much-needed hard currency (the country’s GDP is expected to drop by 35–40 percent this year). It is also a chance to make some space for this year’s harvest, which is forecast to exceed 53 million tons of grain and 15 million tons of oilseed crops: far more than Ukraine’s domestic requirements.
Right now, drought in southern Europe means that Ukrainian grain is in very high demand on the global market. Soon after the deal was signed, Ukraine’s grain exports were almost back to their prewar pace.
If the deal collapses, it won’t just be a major blow for Ukraine, but for the EU too. It will lead to an increase in wheat prices, which will inevitably be reflected in inflation levels, which are already at a record high in the Eurozone: 9.1 % year on year in August. In fact, food prices are the second biggest factor driving European inflation after energy prices.
Grain exports from Russia, meanwhile, fell by 22 % in July and August. Although food supplies are exempt from Western sanctions in the interests of combating food insecurity, bankers and insurers are wary of doing business with Russia, while shipping lines are reluctant to risk sending their vessels into a conflict zone. Many jurisdictions have closed their ports to Russia-linked ships, industry figures say.
So, even if Ukrainian grain disappear from the market, it’s by no means guaranteed that they can be replaced with Russian ones. Western companies and their clients are prepared to bear additional costs in order to avoid working with Russian businesses, especially while the war in Ukraine continues.
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